Tuesday, 16 January 2007

Russia's neighbours left out in the cold by Gazprom

Financial News - Letter from Moscow

Jason Corcoran

January 8 2007

Letter from Moscow
European countries dependent on Gazprom breathed a sigh of relief on new year’s day as the energy group continued to pump gas westward through Belarus following a dispute over pricing.

The former Soviet republic agreed on a five-year contract hours before Russia had threatened to cut off gas supplies, which could have led to shortages along the pipeline in Germany, Poland and Lithuania.

Western European countries shivered in January last year after a similar dispute between Russia and Ukraine resulted in temporary reductions of gas supplies. Gazprom, with its massive energy reserves, supplies a quarter of Europe’s gas to more than 20 countries, with about 80% going through Ukraine and the remainder via Belarus.

The agreement more than doubles the price of gas to Belarus from $47 to $100 per 1,300 cubic yards and allows for the acquisition by Gazprom of a 50% stake in the Belarus gas-transit monopoly, which had previously been resisted.

Gazprom chief executive Alexei Miller said the state-run monopoly was not Santa Claus and that Belarus should not expect any gifts on new year’s eve.

His hardball attitude underscores how Gazprom has turned into one of the Kremlin’s most potent weapons for exerting Russian influence at home and abroad.

Gazprom flaunted its muscles last month by taking control of Sakhalin-2, the world’s largest combined oil and natural gas development, after a sustained campaign against foreign operator Royal Dutch Shell over alleged environmental violations. Shell had its 55% stake trimmed to 27.5%, while minority partners Mitsui and Mitsubishi had their interests halved to 12.5% and 10%, respectively.

Russia’s resource nationalisation is likely to continue unabated despite the likelihood of the European Bank for Reconstruction and Development pulling a loan for Sakhalin-2. The bank’s mandate is to back projects that contribute to the transition towards a free market.

Gazprom and rival energy company Rosneft are expected to take the remaining assets of the beleaguered Yukos oil company in an auction due to take place this month.

Shares in London-listed gold miner Peter Hambro took a pounding late last year following concerns about the fate of its mining licences.

Analysts at Renaissance Capital, Russia’s western-standard investment bank, believe TNK-BP, the Russian joint venture of BP, might be next. There is growing speculation that the venture’s Russian partners will sell out to a state company with BP being forced into accepting a subordinate role.

This growing pattern of the state reasserting control over the country’s natural resources has failed to put a dampener on investor sentiment. The RTS index reached a high of 1921 before closing for two weeks for new year celebrations.

The local bourses reopen for business tomorrow with more than 40 initial public offerings slated for the year at a total value of about $30bn. Among the most anticipated placements are those of large state-controlled banks, Sberbank and VTB.

With several Russian initial public offerings performing poorly in the autumn, analysts said there might not be enough interest from foreign investors to go round.

The Kremlin will breathe easily knowing it can call on strategic investors to pick up any slack. Last year’s Rosneft listing failed to attract large numbers of institutional investors but was covered by those keen to curry favour as Russia’s importance in the energy market grows.


Banks return for IPO revolution

Financial News

Jason Corcoran in Moscow

18 Dec 2006

Investment bankers still have nightmares about the 1998 Russian financial crisis when the rouble collapsed, the fledgling stock market crashed and the government defaulted on its bonds.

The resulting meltdown saw most bulge-bracket banks fleeing to Moscow’s Sheremetyevo Airport. Eight years on they are coming back, tempted by an explosion in initial public offerings, loans and bond issues.

Goldman Sachs is hiring at least 60 people for its third attempt to crack Russia and Lehman Brothers is recruiting heavily, having returned following an eight-year hiatus.

ABN Amro Rothschild has opened a Moscow office while Morgan Stanley, Dresdner Kleinwort, Merrill Lynch and Credit Suisse are expanding operations.

Andrea Williams, a headhunter at executive search firm JBS Associates, said: “The demand for talent among banks in Moscow is massive. They are looking at expats, returning nationals and are trying to lure people from London, New York, Frankfurt and Paris.”

Deutsche Bank was one of the few international banks to remain active in Moscow after the 1998 crisis. Charlie Ryan, its chief executive in Russia, distinguishes the bank from its rivals as an institution willing to take a leap of faith and view the country as a place to find clients, rather than a place to do the occasional deal.

Ryan, an American, arrived in Russia in 1991 to work for the European Bank for Reconstruction and Development and has seen banks come and go. He said: “Competition will be healthy for the market and hopefully they will stay this time. In the past, they have viewed it opportunistically. The reality they will all discover is that the Russian investment banking business is not a get-rich-quick scheme.”

The banks are pressing on with expansion, despite difficulties doing business in Russia, notably potential political risks and organised crime. Russia’s deputy central banking chief Andrei Kozlov, who was leading a crusade to clean up the murky financial sector, was shot dead in a gangland hit in September.

The boom in IPOs may indicate companies are concerned stock prices could fall amid political uncertainty as President Vladimir Putin prepares to step down in 2008, according to Citigroup analysts.

Citigroup estimates 48 Russian companies will raise about $38bn (€29bn) in share offerings this year and next, six times more than was sold over the previous decade. In many cases, owners are selling shares and moving the money offshore, Citigroup said.

Al Breach, chief strategist with UBS in Moscow, said the good times are dependent on the continuing petroleum boom, but he believes economic fundamentals are much better than in 1998.

Breach said: “There are risks and the return of the investment banks is conditional on the economy and the oil price not plummeting. The economy in 1998 was built on credit but people are gaining assets abroad now and they are not as vulnerable to a credit crunch.”

Eric Kraus, head of the Moscow-based Nikitsky Russia fund, believes the country is the most accessible of the so-called Bric markets – Brazil, Russia, India, China. He said the market has overpriced the risk from regime change.

“The wheels are not going to fall off the gravy train this time. Russia has the third-largest forex position and $80bn in its stabilisation fund. Oil prices could hit zero for three years and the budget could still be balanced,” he said.

Deutsche Bank rakes in the roubles from Russia

Financial News

Jason Corcoran in Moscow

December 11 2006

Ownership of UFG pays dividends

Deutsche Bank’s status as adviser to gas group Gazprom and its close relationships with other state-controlled Russian monopolies is the envy of Moscow’s investment banking community. Its decision to take full ownership of the Russian investment bank UFG in February has only cemented its commitment to the country.

The move seems to be paying off with Deutsche powering ahead this year in mergers and acquisitions, equity capital markets and debt financing despite several staff departures.

Deutsche, which employs more than 700 people in Moscow, has had ties with Russia since its financing of a natural gas pipeline in the 1970s during Leonid Brezhnev’s leadership.

Charlie Ryan, chief country officer and chief executive of Deutsche Bank in Russia and founder of UFG, said: “I think this clear and strong bond between Germany and Russia is a positive. The more we can integrate Russia economically with the west, the safer the world’s going to be. I think we are doing God’s work there.”

Western investors have criticised Deutsche and other banks for helping the Kremlin to regain control of Russia’s natural resources, but this has not daunted Deutsche’s Moscow management.

The bank’s recent work with national champions Gazprom and Rosneft has put it under the spotlight. The bank advised Gazprom on its bid to buy Yuganskneftegas, the main production asset of the beleaguered Yukos oil company, as well as two privately owned oil groups Surgutneftegaz and Sibneft, acquired from oligarch Roman Abramovich.

In the case of Yuganskneftegas, Deutsche wanted to help fund Gazprom’s plans for a $10bn bid (€7.7bn) for the Yukos subsidiary but a Texas bankruptcy court judge granted an injunction barring Gazprom and its lenders from taking part.

Rosneft, the state-owned oil company, ultimately took control of Yuganskneftegas, which led to the end of merger talks between Rosneft and Gazprom. Deutsche now finds itself in the middle of a battle for the remaining assets of Yukos, which include two oil production units and five refineries.

Ryan hopes Deutsche can service both companies, although his team was not selected to join a syndicate of six banks putting together a $24.5bn loan for Rosneft to acquire the remainder of Yukos. He said: “Rosneft and Gazprom are clients and we definitely work for both companies but we have a rigorous system for managing conflicts. The fact we can be relevant and offer services and work on deals for Gazprom and Rosneft is the reason we are so happy with the merger.”

However, analysts believe UFG has lost its cachet as one of the few remaining Russian independent banks after the Deutsche move. A Moscow banker said: “UFG gained a balance sheet but it gave up its independence for a huge bureaucracy, which hasn’t played well with some clients.”

A former UFG employee said: “They are doing more blue chips now and have Deutsche’s debt capability but Troika and Renaissance would be seen as sexier brokers.” Last week, Troika hired Goldman Sachs to advise it on a possible IPO.

Ryan, an American, first arrived in Russia in 1991 to work for the European Bank for Reconstruction and Development in St Petersburg. His job assisting the country’s privatisation programme brought him into contact with reformers, including Vladimir Putin, then deputy mayor of St Petersburg.

Ryan set up UFG with Boris Fedorov, finance minister under Boris Yeltsin, in 1994. Fedorov, who left UFG shortly before the merger, is a director of Gazprom, the state savings bank Sberbank and sat on the board of the electricity monopoly, Unified Energy Systems.

UFG prospered after the 1998 financial crises, which sent most US investment bankers scampering home. It made its mark by helping foreign investors get round restrictions on foreign ownership of local shares in Gazprom.

The success of the initiative meant that at one stage Gazprom represented as much as 25% of UFG’s business. By 2002, UFG needed access to a global bank’s capital and products to serve its blue-chip clients so Ryan started talking to western banks about a tie-up.

Ryan said: “We were clearly becoming less relevant to companies like Gazprom. It was impossible for the likes of UFG, Troika and Rencap to be relevant to a company of that size.”

Deutsche Bank acquired a 40% stake in UFG in 2004 and bought the rest this year for an estimated aggregate price of $700m. The completion of the merger led to the departure of executives, including Christopher Granville, UFG’s chief strategist, Derek Weaving, head of utilities research, Paul Swigart, head of the international sales team, and equity salesman Mike Stein.

Competition in Moscow is set to intensify. US banks Goldman Sachs and Lehman Brothers plan to return but Ryan is not quaking in his boots. He said: “It will be healthy for the market and hopefully we will stay this time. In the past, they have viewed it opportunistically. The reality they will discover is the Russian investment banking business is not a get-rich-quick scheme.”

He plans to develop Deutsche’s derivatives platform and expand DWS, its private banking operation and retail fund management business. Ryan claims the revenues Deutsche generates from Russia are larger than any other investment bank, although Frankfurt will not allow him to disclose any figures.


Beginnings of a revolution as Russia hikes gas prices

Business News Europe

December 8, 2006

Jason Corcoran in Moscow

Russia's plan to raise gas prices by 15% next year and fully liberalise the domestic market by 2011 was hardly the shock therapy the industry had hoped for, but the outcome is still a shot-in-the arm for the players in this market.

Last month's cabinet-approved blueprint, which came after two months of debate, calls for a 15% rise in the domestic gas price in 2007 from $44 to $51 per 1,000 cubic metre (cm) and a 25% rise in 2008 to $63 per 1,000 cm. Ultimately, the plan calls for the domestic gas price to converge with European gas prices by 2011.

The government will introduce a deregulated market from January 2007, whose share will initially be 5% of total deliveries to the domestic Russian market. From July 1, the share of the deregulated market will increase to 10% with further increases being made twice per year going forward.

Analyst assumptions estimate that 30bn-36bn square metres of gas will be traded at the deregulated price in 2007.

State monopoly Gazprom is primed to be the main beneficiary and its representatives have already said that domestic deregulation will raise the company's operating cash flow three-fold by 2011. The measures should also have a positive effect on independent gas producers Novatek, Lukoil and Rosneft, who will have the opportunity to sell their gas on a liberalised market at higher prices.

The government has adopted a piecemeal approach to energy market reform, adhering to its original modest proposals for raising gas prices and deregulating the electricity sector.
Gazprom had lobbied hard for the right to sell more of their output at free market prices, but the finance and economic ministers argued such a move would add half a percentage point to inflation over the next two years.

Dmitri Fedotkin, economist at VTB Europe, says: "It was a tough decision for the cabinet to make with the upcoming elections and it is relatively positive for gas producers, but it's not the doubling of prices they had fought for in the near term."

Fair price confusion

The polarised debate over the prospects for gas liberalisation is reflected in investment banks' contrasting estimates of Gazpom's "fair value" share price.

Prior to the announcement, Renaissance Capital had Gazprom as a 'Sell' with a fair price at about $8.25 a share, while UralSib marks the company up as a 'Buy,' expecting the stock's price to top $17 in the near future. Renaissance had factored in the slow pace of deregulation more highly into its valuation, whereas UralSib's emphasis was on Gazprom's growing export business.

Renaissance, which declined to say whether it is reviewing Gazprom's target price, remains sceptical of the liberalisation pay-off. "The key regulatory and legislative steps needed to make a liberalised market actually come about and work are missing," says director of oil research Adam Landes. "Second, it remains unclear who will capture these higher end-customer prices. Will independents get it, or will Gazprom take a disproportionate cut via transportation fees?"

Uralsib views the gas tariff hikes as a boon for both Gazprom and leading independent Novatek, and has boosted their target prices by 18% and 52%, respectively.

Aton Capital has kept its 'Hold' ratings on Gazprom and Novatek, while Deutsche Bank/UFG is reviewing its models for both companies.

Tariff hikes hit bottom lines

The newly approved plan is expected to augment Gazprom's earnings by $2.7bn (or more than 10%) in 2008 and a further $6bn in 2009. Ultimately, the plan will add $17bn to Gazprom's 2011 earnings, a 70% rise above projected earnings without the tariff hikes. Fitch Ratings has already raised Gazprom's outlook from stable to positive following the announcement.

Fitch forecasts the revised gas price will increase Gazprom's top-line revenue roughly by $43bn, and EBITDA by $15bn over the next five years, if oil prices remain $50-60 per barrel by 2010-2011. If oil prices slip back to $40 per barrel, Gazprom's revenues and EBITDA in the same period are expected to rise by some $29bn and $10bn, respectively.
Hermitage Capital, whose biggest bet is Gazprom, sees plenty of upside for the state monopoly and Russia's oil producers.

"The increase in the domestic price of gas is also good news for Russian oil producers," says a Hermitage report. "This is something that the market has not yet fully appreciated."

Novatek, a pure-play gas producer that sells all of its production domestically, has fully incorporated the impact of liberalisation and now trades at 29.8 times 2007 earnings.

Gazprom, which sells some two-thirds of its production domestically, trades at only 11 times 2007 earnings. Lukoil, which could get over 10% of its revenue from gas sales in three years, trades in line with the other pure-play Russian oil majors at 10 times earnings. In total, gas makes up some 13% of the reserves of Russian oil majors, but only a tiny percentage of their current revenues.

Hermitage said its discussions with management at major Russian oil companies indicate that a significant part of their growth strategy and future business will come from the domestic gas business.

"As the domestic price of gas rises, it will become much more economical for these companies to develop and monetise their gas reserves. Taking advantage of the domestic gas opportunity will help enable these companies to continue to post impressive earnings in the future," it reckons.

Mattias Westman, chief executive of Prosperity Capital Management, believes the drift towards full liberalisation will slowly open up the market to more independents.

"Gazprom is unable to supply all the needed volumes and does not really respond to price signals. It should be good news for both large and small independents even if it might take some time," he says.

For Gazprom, the upshot of full liberalisation is less certain as it focuses on meeting its export demands.

"The pain of eventually separating production and transportation is still vaguely in the future but they will however get higher prices," says Westman.

Putting a price on Gazprom

Business News Europe

Jason Corcoran in Moscow

Analysts at Russia’s investment banks could almost be forgiven for their wildly conflicting valuations of Gazprom with the state-controlled giant still adopting a parsimonious approach to corporate transparency.

Gazprom's stock is currently trading at between $10.50 and $11.00 and the price has been fluctuating pretty wildly in recent weeks since the Kremlin opened a debate on whether to sharply hike gas prices next year and the gas monopolist announced it would massively increase its capital expenditure. Gazprom shareholders have been left trying to make sense of the news.

The confusion has dogged the company all year and is most evident in the wild discrepancies between investment banks' estimates of the "fair value" of the share price.

At one end of the spectrum, Renaissance Capital has Gazprom as a "sell" with a fair price at about $8.25 a share, while UralSib marks the company up as a "buy," expecting the stock's price to top $17 in the near future. This is a huge spread by any standards, so what can explain the gaping chasm between these two prices?

Different drivers

Renaissance had at one point the most aggressive target price, which goes to show it is not intrinsically negative on the stock. Its current view is founded on the speed of domestic gas price liberalisation, Gazprom’s ability to cut costs and the effectiveness of its investment programme, according to head of research Roland Nash.

“We have no problem in admitting that the company could be valued at well above current levels, and even above UralSib estimates,” says Nash. “However, it can only do so by becoming more efficient and cutting costs. The burden of proof remains with the company. When we see progress, we will obviously amend our target price. So far we have seen little.”

Renaissance’s stress on gas liberalisation is not shared by UralSib, which has factored in a 15% gas price increase for next year and potentially 20% for 2008.

"Our drivers for Gazprom are not domestic production nor liberalisation,” says Alex Kormschikov, an oil and gas analyst at the UralSib. “Our drivers are based on the growing export business, with Gazprom gaining foreign assets in an effort to build an entire energy chain to serve consumers in Europe.”

Fund managers who hold Gazprom stock have been less than impressed with some valuations. “Analysts are not taking all the factors into consideration if you look at that spread," complains Vadim Kleiner, director of research at Hermitage Capital Management.

Mattias Westman, chief executive of Prosperity Capital Management, errs towards the lower the end of the spread. “We are more inclined to agree with lower valuations since the shareholders see so little in terms of returns,” he says. “Gazprom has the best assets in the world, reports good profits but has no cash-flow. All operational cash-flow goes to capex and there is very little in terms of growth to show for it.”

To be fair to analysts, Gazprom’s level of disclosure hardly befits a company whose market capitalisation recently overtook that Microsoft.

The recent announcement it was doubling its capex from $12bn this year to some $22bn in 2007-2009 left many scrabbling to find out details on how the money will be spent.

“We need more detail from them on the investment programme. So far we only have the negatives, which reduces the value tremendously,” says Kormschikov.

There appears to be at least as much chance that Gazprom will use the extra capital to buy into other non-core activities, which may not be the best use of the funds. Analysts at Alfa Bank continue to have Gazprom under review as they revise their model to take into account the increase in 2007-2009 capex.

Divided government

The question of state regulation of gas prices and the liberalisation of the gas market is preoccupying the government, with ministers appearing split over the issue. Economic Development and Trade Minister German Gref has criticised plans to raise gas prices by more than 15%, while energy officials are reported to favour higher energy prices and less state interference in Gazprom.

President Vladimir Putin is clearly reluctant to let inflation rip by allowing prices to rise too fast, but he knows there is a risk that there might not be enough supply under the current system. One solution is to raise prices to decrease demand and maybe encourage supply from independent producers

“I think there is an unfinished discussion about this," says Westman. "In my view, it would be better to liberalise and let others produce more: Gazprom, naturally, does not like this scenario."

Domestically, a political consensus is building that price rises need to take place to stimulate efficient use of gas and mitigate the impact of an anticipated gas shortage. Analysts at Troika have even suggested that 2007 could become the first year when Russians' demand for gas exceeds Gazprom ability to supply it.

"Recently there has been talk about sharp increases, which is needed," says Hermitage Capital's Vadim Kleiner. "The demand for gas is big, but Gazprom does not have the resources to meet domestic supply when they are sending so much abroad."

Prime Minister Fradkov last month signed a decree allowing up to 10bn cubic meters (cm) to be sold domestically at unregulated prices. Although small in scale, this move reflects, some feel, what will become a broader tolerance for at least limited gas price hikes for domestic industrial customers from the current low level of $42 per 1,000 cm.

Another positive move was Gazprom’s deal to take Lukoil’s gas from the Nakhodkinskoye field at $40 per 1,000 cm beginning July 1, 2007 – twice what it paid in 2006.

To prevent any potential gas deficit on the Russian market, Gref and other officials have called for independent producers such as Novatek and Lukoil to be given more incentives to sell gas at home.

While Gazprom appears to be producing enough gas to meet its commitments for export, its domestic supply is another matter, with consumers already having a hard time getting enough.

The company recently conceded that supplies were running low and called on the government to act to avert cutbacks similar to last winter's, which also led to shortfalls in supplies to Europe

For its part, Gazprom appears ready and willing to leave a larger share of the domestic market to independent producers so it can pursue higher margins from pipelines and distribution networks in other countries.

“The prospects for independents and more established companies are very bright,” says Westman. “They will probably be allowed to produce and sell more at the same time as Gazprom raises the prices on the wholesale market. There is a lot of potential for production growth in several companies.

Lukoil is already ramping up with plans to raise gas production from its considerable reserves to 70bn-76bn cm per year by 2016 from the present 9.2bn cm per year.

Analysts at MDM Bank estimate Lukoil’s gas business adds another 23% to its current market value based on higher gas production growth rate and an assumption that domestic gas prices will move up while the oil price declines.

Based on official figures, Lukoil had 1.12 times more proven gas reserves and 1.29 times more 2P reserves than Novatek, Russia’s second-largest independent gas producer.

Novatek this week said its gas output increased 13.7% during the first nine months of the year, to 21.5bn cm.

Prosperity catches up on Hermitage Capital in Russia

Financial News

Jason Corcoran in Moscow

04 Dec 2006

Hermitage shares top investor spot

A shake-up of investors has resulted in Hermitage Capital losing its position as the largest single foreign investor in Russian equities. Prosperity Capital Management, a fund manager founded by Mattias Westman a decade ago, has caught up with Hermitage and is neck and neck with its rival.

Hermitage’s assets under management have fallen from $4.5bn (€3.4bn) to $3.2bn since manager and chief executive Bill Browder was barred from entering Russia last November on the grounds he posed a threat to national security. Meanwhile, Prosperity’s asset base has gone from $1.8bn to $3.2bn, although chief executive Westman attributed a small portion of the inflows to clients switching from Hermitage.

Asset managers, such as Capital Group and Franklin Templeton, which run emerging market equity portfolios, are also investors in Russia but, unlike Hermitage and Prosperity, they make global allocations.

The doubling of the flagship RTS share index over the past two years has gained the interest of western pension funds while this summer’s equity volatility led to the arrival of hedge funds.

Westman said: “Some of the more conservative money is coming into Russia for the first time. We have had more mainstream investors, such as a $125m mandate this year from a European government pension fund.”

Browder, who is managing his fund from London, remains “100% confident” of regaining his visa and returning to Russia.

He said: “It’s been a good year, although we got caught on the wrong side of oil in the second quarter which had nothing to do with the visa. Half our team is Moscow-based and they continue to visit the companies and government officials. I am probably safer in London from a corporate governance point of view.”

The fund registered a return of 31% for the year against an RTS index return of 52%. Since launch, it has posted annualised gain of 36.8%.

Prosperity has also attracted funds for a private equity-style vehicle that listed last month on London’s Alternative Investment Market. The $250m Voskhod fund will invest in small and medium-sized Russian and Commonwealth of Independent States companies involved in corporate restructuring and consolidation.

Prosperity is fighting plans by oil group Lukoil to merge one of its fully-owned
production units with Ritek, in which Lukoil has a 65% stake. It has offered to buy Ritek shares at a 21% premium from shareholders if they vote against a planned restructuring at next month’s annual meeting.

Westman said: “We have the backing of a large number of shareholders and it is going to be quite tight. It is clear the merger proposed by Lukoil is not accretive for shareholders.”

Prosperity’s funds recorded an average return of 150% last year while they are up 45% this year, according to Westman.

New York-based Firebird Management, which has more than $2bn invested in Russia and the CIS, has returned 50% for the year in its two main Russian funds.

Ian Hague, a co-founder of Firebird, said it had won mandates from US endowments, US and European pension funds, family offices and fund of funds, such as Permal. He said: “We are getting more interviews with the consultants and we have won a mandate from a northern English city pension fund.”

The top three Russian fund managers – Prosperity, Hermitage and Firebird – employ a buy-and-hold strategy and rarely hedge investments. But the equities sell-off in May provided a new generation of long/short funds with the opportunity to prove hedging can be beneficial.

Troika Dialog’s Russia Fund, which has $75m under management, takes short and long bets in Russian-listed companies and, to a lesser extent, in CIS countries such as Ukraine and Kazakhstan.

Goldman Sachs hires 60 for Russia

Financial News

Jason Corcoran in Moscow

27 Nov 2006

Goldman Sachs is hiring up to 60 people for its Moscow office, two months after receiving its first Russian securities brokerage licence.

The US investment bank has a large pipeline of deals, including next year’s $2bn (€1.5bn) flotation of state-owned Vneshtorgbank and the initial public offering of OGK-3, a subsidiary of the electricity monopoly.

However, Goldman faces stiff competition from local and international rivals in Moscow where there is a premium for talent. Headhunters said Lehman Brothers was hiring 20 people after it decided to return to the Russian market after an eight-year hiatus. ABN Amro Rothschild, which recently opened its Moscow office, is rumoured to be hiring a team from local brokerage Aton Capital.

Two headhunters working for Goldman said it was hiring heavily in equities as well as in debt capital markets and advisory services.

Goldman is also planning to hire corporate finance and support staff as part of the expansion. One headhunter said: “They are tiny at the moment but I believe they are going to hire about 200 bankers plus the necessary IT and back office so they can compete with the likes of Renaissance and Troika.” Goldman Sachs declined to comment.

Its decision to build organically in Moscow follows failed takeover talks last year with Aton Capital.

Alla Bashenko, director and head of Russia at Goldman, is believed to be moving to Russia from London with other Russian-speaking staff.

The investment banking team is being led by Magomed Galaev, who left as Morgan Stanley’s co-head of investment banking in Russia for Goldman in June.

Goldman last month bought a minority stake in Sequoia Credit Consolidation, Russia’s leading debt collection agency.

Wealth management: Russia attracts private banking operations

Financial News

Jason Corcoran in Moscow

30 Oct 2006

Investment banks Credit Suisse and UBS are launching onshore private banking services in Russia, following the success of a Deutsche Bank wealth operation launched two and a half years ago.

Deutsche Bank Private Wealth Management has attracted clients worth nearly $1bn (€790m). Claus Korner, head of the bank’s operation in the country, said: “We have shown there is money to be made in Russia. People who make money here no longer have the target of leaving the market while they can earn higher revenues by staying.”

UBS recently received a banking licence from the Central Bank of Russia. It plans to offer wealth management, asset management, rouble fixed income and foreign exchange services to complement operations in Russia.

Alexis Rodzianko, head of private banking Moscow at Credit Suisse, said economic and political stability, favourable tax laws and the growth of the domestic stock market was helping money to stay in Russia. Rodzianko, who set up Deutsche Bank’s offering in 2003, said the introduction in 2001 of a 13% flat tax helped jump-start the market.

Credit Suisse’s Russian onshore operation aims to attract between $300m and $600m in its first year, although Rodzianko said this would be many times less than sums going offshore.

According to Korner, estimates of the size of the onshore market vary from $40bn to $400bn. Government data indicates private capital outflows from Russia totalled $9.4bn in 2004.

Credit Suisse is providing clients with access to domestic bond and equity markets and basic banking services such as cash and deposit accounts, before expanding to a full-service offering.

Rodzianko said Russians were likely to be relatively aggressive in their onshore investment habits. He said: “They view places such as Zurich, London and New York as safe havens or reserve locations and tend to be more conservative with their money there.

“Here is where they take their risks; this is where they make the money and this is where they know the market.”

Rodzianko believes a shift from offshore to onshore banking makes his life easier.
He said: “Whoever brings their money to Credit Suisse in Moscow has to show us a tax return so, by definition, we are dealing with declared funds. We are careful and watch with whom we do business.”
Financial News

Renaissance revels in independent status

Jason Corcoran in Moscow and Harry Wilson

02 Oct 2006

Russia’s largest private investment bank has become an international contender

Banks are back into Russia in a big way. The default in 1998 is a distant memory, but it was during those chaotic days that what is the country’s largest private investment bank was born.

Renaissance Capital is a rarity among developing market banks. In China, Brazil and India – Russia’s traditional partners in the Bric nations – it is easy to find large commercial banks, but look for a genuine competitor in the investment banking sector and few are found.

Renaissance has in the past two years grown from a junior bank into an international contender and a rival for bookrunner roles on bond issues or flotations. In the past week, Renaissance has won mandates to lead the $1bn (e790m) London listing of steel producer MMK, alongside ABN Amro Rothschild and Morgan Stanley, and the sole bookrunner role on the London flotation of Kazakhstan’s largest bank, Kazkommertsbank.

One Moscow-based observer said the main appeal of Renaissance was that it provided western-standard investment banking. This has been the focus of chief executive and founder Stephen Jennings.

One former employee said: “Jennings saw what no one else could and created what no one else thought could be built – a full-service Russian investment bank.”

Renaissance began in 1995 as the securities trading arm of Renaissance Group, a private financial company. The Russian government’s default on domestic bonds in 1998 gave Jennings the opportunity to transform the business into a full-service investment bank.As the economic crisis engulfed Russia Jennings bought out three other shareholders,, Leonid Rozhetskin, Richard Ditz, and Anton Kudryashov, taking sole charge when the others left.

The crisis led international banks to pull out of Russia. Only now is Lehman Brothers, which was hard hit by the default, re-entering the country. Lehman has a joint venture with Renaissance Capital for M&A advisory but is now expected to establish its own presence (see below).

For Renaissance, the withdrawal of so many banks provided the opportunity to grow into a firm employing more than 300 people. One banking analyst said: “Renaissance is the sexiest piece of investment banking on the block. Jennings has capitalised on the oligarchical connections and he also forecast Putin’s backlash four months before he took office.”

The bank has become notable for its aggressive hiring from bulge-bracket competitors. Last week it recruited six bankers for its fixed-income business, taking them from groups including Dresdner Kleinwort, Morgan Stanley and Moscow-based rival Troika Dialog. The Dresdner hires brought the total from the bank last month to three, and followed Renaissance’s appointment two months ago of Bob Foresman, head of the German bank’s Russian business, as deputy chairman.

Renaissance’s lure is simple, according to one headhunter – multi-million dollar pay packages and the chance to earn more in one of the world’s most lucrative markets.
By the start of this year the number of shareholders exceeded 50, according to one source, providing a vivid example of its rapid growth and the way it has attracted top investment bankers.

Renaissance is unlisted and employees who leave receive only the book value of their stock which, while significant as it is valued at $1bn, does not represent the likely market value.

Jennings has said he has no plans to float the company, despite the success the firm has had in listing other Russian businesses. He has also said he has no plans to sell the bank to a rival, a path taken by other Russian brokers.

According to a Moscow-based friend of Jennings, he believes the firm’s value lies in remaining as the country’s last independent broker, with Russian rivals Aton Capital and Troika Dialog thought likely to be bought soon.

One Moscow-based analyst said: “It is an interesting time for Renaissance. It could conceivably be the only independent investment bank in six months with Troika and Aton in the shop window.”

Troika is understood to be in discussion with Japanese banks interested in buying the firm, after ending negotiations with JP Morgan. Last year Deutsche Bank bought Russian broker UFG, and in 2004 UBS bought Brunswick.

Goldman Sachs is rumoured to have considered buying Renaissance, and the two have worked closely in the past. Several large international banks, including Citigroup and JP Morgan, are also thought to have considered buying it.

The problem for an acquirer is its price, which will exceed $1bn, according to market observers. This is considered by many banks too large an exposure to take on Russia. Renaissance is competing well as an independent and is ranked seventh in Thomson Financial’s league table of Russian equity underwriters, despite not being a bookrunner on Rosneft $10.6bn IPO.

Last year Renaissance hired Hans Jochum Horn, former managing partner of accountancy firm Ernst & Young’s Russian and CIS business, to develop the business. It has branched into areas outside its main business, such as asset management, which the firm expects to grow rapidly as Russians invest their new-found wealth.

But, to unlock Renaissance’s value, analysts say it will have to consider a listing or trade sale. One market observer said: “Renaissance has a unique proposition at the moment, the question is how it deals with the increase in competition in the Russian market.”